Red Door Solutions

Your credit score is a number that is assigned to you – between 300 and 850. The higher the credit score – the better. 

The more credit worthy you are deemed to be, the easier it will be to get loans and, equally as important, to get them at low interest rates. 

So how is your mortgage credit score determined?

Whether you are applying for a home loan, car loan, credit card or other form of credit, the lender will want to look into your credit history to see how well you have handled your debts in the past. 

Credit lenders will ‘pull a credit report’.  In Canada, the two most popular credit reporting agencies are Transunion and Equifax.  You can, and should, request a copy of your credit report  so you can see what is written and to make sure there is no false information.

The credit report will have personal information about you including your name, social insurance number, date of birth, current address, past addresses, current and past employers and your phone number.   When considering your loan, the lender will look at information including your years of employment, income, whether you own a home or other assets, and what sort of down payment you have (when applying for a mortgage).  They will also look at the type of property you are looking to buy.

The financial information that is on your report will include a list of all current and past debts, including loans and mortgages; lines of credits; credit cards; store cards; bankruptcies or other judgments, as well as debt referred to a collection agency. 

Most lenders have their own criteria for scoring and lending guidelines, your credit history is basically compared to the credit history of others with similar profiles and histories.   The newest information (recent late payments or defaults) will hold more weight than older information, since it may indicate that you are currently having trouble financing your obligations.

Not all debt is viewed in the same light.  They will look at the type of credit you use and want to see a balance over different types of debt – not just all credit or store cards (which are considered unsecured debts).  Mortgage payments are considered ‘good’ debt since they are secured against an asset, and regular, punctual payments show that you take your obligations seriously.

So how do lenders/agencies determine your credit score?  All of the  factors on your credit report are taken into consideration, but not everything holds the same weight.  The breakdown of importance is roughly as follows:
Payment History - 35% .    Lenders will look at your history of bill payment and see how many were paid late and if any were sent to collection agencies. 

If you had any bankruptcies, this will also negatively affect your score.
Outstanding Debt – 30%.  The more debt you have, compared to income and assets, the less credit worthy you will seem.  Lenders will look at how much you owe for your car loans, home loans, on your credit cards, etc.  They will also look to see how much available credit you have. 

If your cards are all at the limit, it will greatly affect your score.  In general, you want to keep your credit cards at 20-30% or less of their limits.

Credit History – 15%.  Lenders will look to see how long you have established credit.  The longer – the better, since this gives them a better view of your payment history, which helps them better predict your future likelihood to pay your debts.

New Credit – 10%.  As mentioned earlier, lenders are more concerned with the most recent information.  If you are planning on making a big purchase, like a home, it is best not to apply for credit in the weeks and months leading up to your mortgage application.  Opening new credit accounts and having lots of credit reports pulled by lenders will lower your credit score.

Types of Credit – 10%.  Again, lenders want to see different types of credit, including installment loans and revolving credit accounts, to see how you handle debt.  They do not want to see all credit cards run up to the max.

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